December 26, 2008

Idiocy Comes Home To Roost

"Just $5 million of work is needed to complete a new California Court of Appeals building in Santa Ana. The state may not have the money, and come July judges may be writing opinions in their living rooms.

"I've been on the bench for 23 years, and I've never seen anything like this," said David G. Sills, the presiding justice for the Fourth District Court of Appeals, Division Three, in a telephone interview.

California's worst budget crisis has held up $3.8 billion in spending on public works, possibly including the courthouse adjacent to Santa Ana City Hall. Sills and his seven fellow jurists had planned to move in before the lease on their temporary offices expires June 30.

"Everyone will have to work from home," said Sills, 70, "and we'll have to rent a place for when we hear arguments.""

As Krugman says, this is exactly the opposite of what's needed right now. But the problem isn't just the economy, and California's need to balance its budget. It's Proposition 13. Proposition 13 was cleverly designed to make it virtually impossible for California to raise taxes. Any tax increase requires a supermajority. Property taxes are fixed at 1% of assessed value, and assessments themselves are fixed at the time of purchase, and can rise only very slowly thereafter.

This leads to all sorts of idiotic consequences. Back when I lived in California, one of the few ways of raising taxes available to cities and towns was to increase the sales tax by some fraction of a percent. Result? Cities and towns did this, and then tried desperately to induce people to set up car dealerships and other places where people sell big, expensive things. Did it make sense to have so many car dealerships? Who cares! It's revenue!

Likewise, people in California don't always sell their houses when it would normally make sense to do so, because as long as they stay in their existing house, the assessment will not rise much and their taxes will stay low, whereas if they buy a new house, it will be assessed at its purchase price, and their taxes will go up.

"Free markets", indeed.

My favorite Prop 13 anecdote: while she was alive, my grandmother lived in a wonderful house that she had (I believe) designed herself in the 50s or thereabouts, and built on what was then an undeveloped hillside. As time passed, however, that property became much, much more valuable, which makes sense since it was on the border between LA and Beverly Hills, on a delightful secluded street that ran up the hillside and dead-ended at the top. Phil Spector lived next door, and Eartha Kitt lived up the street.

Meanwhile, I had a good friend who lived in a house in a terrible neighborhood (as in: there were shootings nearby on a fairly regular basis.) The only famous person who lived near her was Rodney King. Her house itself was great, but it was also in a state of considerable decay when she bought it, and needed a whole lot of work.

Guess who paid the least in property taxes, by a considerable margin? My grandmother, of course. Having a cap on property assessments in place for decades will do that.

The result, of course, is that California has been deferring maintenance for a very long time. Now their judges will be working from home, their schools will fall further into decay, and their bridges will continue to crumble. With any luck, Obama's stimulus plan will help out with the worst of it; my only regret about that is that it will postpone the day when Californians have to confront the idiotic tax policies they put in place.

Comments

Not to get all biblical, but as you sow, so shall you reap.

Locally, property values have dropped 20-25%, but the county is still using old assessed values for taxes. Part of the claim is that dropping property taxes would cause large cuts in local programs (but somehow, they had to keep cutting budgets even as property values shot up 30-50% in the previous five years). Then there were the multi-million dollar "public improvement" projects that built a new police building (over half unused), city hall (on prime commuter parking land) and retention pond (tearing down 20 homes, and replacing them with synchronized & lighted fountains). Then the park district wondered why their proposal to build a new center got shot down by a 20% margin in the last election.

Colorado will be demonstrating their own version of fiscal insanity during 2009. Any tax increase, or borrowing that crosses a fiscal year boundary, by any level of government, requires a vote of the people. The latest tax revenue forecasts done by the non-partisan state legislative staff show that when the General Assembly convenes in January, they will have to cut $600M in General Fund spending from the current fiscal year budget, and a bit over a billion dollars out of the 09-10 fiscal year budget proposed by the governor. Not on the scale of California, but very large for us.

In all honesty, I see little chance that the state can cut General Fund spending that far without making drastic reductions in the services provided by Medicaid. If Obama and the Ds in Congress are looking for a bold stroke to provide assistance to the states, let them make Medicaid a purely federal program. Counter-cyclical entitlement programs are very difficult for most states to finance, as they can't print money, and most have severe limits on how much and for what they can borrow.

It can even be implemented very quickly, simply by reimbursing states at 100% (rather than the current 50-70%). Actual transfer of responsibility for administering the programs can be done over a more reasonable period of time.

With Rodney King and Phil Spector living in the neighborhood, there must be a judge in a house nearby who could hold their various trials and hearings in his or her living room.

There could be a holding cell in the bedroom and in Spector's case, an electric chair in the basement in case he's ever found guilty of putting strings and women's voices on "The Long and Winding Road".

Should a pardon be forthcoming from the governer's house down the road, "Please, Please Mr. Postman" could be wall-of-sounded at low cost through Howard Jarvis's tone deaf hearing aids, the dead f--k.

Spector's wig collection could be combined with Eartha Kitt's and with Larry Kudlow's spleen and housed in its own palatial estate so that it didn't have to pay increased property taxes, the replacement hair having been plucked from Ronald Reagan's skull.

This entire home-based justice system would appeal to our idiot anti-tax libertarian faction by housing judge, jury, and executioner under one low-overhead roof.

The jury could sit on the couch.

Bailiff, schmailiff, the accused could announce himself ..... or not.

Who needs bridges and roads when defendant, judge, jury, and executioner all live under one roof?

Move the Republicans in the California legislature into the same house and they can line up outside my bedroom and kiss my ass tax-free.

While they're up, they can tiptoe through the livingcourtroom and fetch me a beer from the kitchen.

Think of the convenience.

Charles Manson and his merry band of tax-hating elves (the squeaky fromm gets the grease) could have just remained in Roman Polanski and Sharon Tate's house and have been jailed and tried right there in the living room, with the judge housed in his own special closet the night of the crime.

A Murphy Judge!

Prisons? What are garages for?

And don't think Barbara Streisand gets off scot-free .... no siree .... when I get done raising her property taxes, she's going to dig up Howard Jarvis's cheap butt and sing into it on her next HBO special.

I think you have this backwards. The problem isn't the difficulty in raising taxes (we have the highest sales and income taxes in the country) the problem is that our legislators are incapable of living within the budget.

Despite what everyone has told you California has MORE money coming in that a few years ago, but the spending has so outstripped the income that the state is about to fail.

I have to agree with David. Weird as our tax system is, it doesn't add up to our being a low-tax state. (It does result in large businesses, which move far less frequently than people do, paying much lower property tax than they would without Prop. 13, but that's mostly an issue of fairness.)

One effect of prop 13 was the creation of a huge state bureaucracy for K-12 education. This was the result of a post-Prop 13 bailout: schools were traditionally funded by property taxes, so the shortfall after Prop 13's rollbacks was made up by the state -- and with money comes "oversight" and additional administrative expense on both the state and district level. Federal mandates such as NCLB add even more to these twin bureaucracies. And this is just an example of the Rube Goldberg arrangements put in place to handle the massive effect Prop 13 had on local taxation and resulting state bailouts.

My brother has good stories about the California Republican party calling him, and getting bad results, before pulling out the big guns: "well, surely you think taxes are too high?" "Actually, I think taxes are too low, and that's why we're having budget trouble" *sputtering*.

As for California's status, it doesn't seem that its per capita taxes are that extreme. They're higher than most states, but California's median income is almost 20% higher than the national median.

In any case, whether or not California's taxes are low, you can think there's something a little weird about a system where it's that hard to raise taxes--it's an especially effective way to insure wild fluctuations in whether government programs are funded, and that's probably the worst of all worlds.

I'd be interested in learning more about Prop 13's effects on education in CA that idlemind mentioned above. I was under the impression that centralizing education was generally a major improvement given the perverse incentives surrounding decentralized school boards and the funding inequality associated property tax funding of education. Can anyone describe how these effects have actually shaken out in CA in practice? For example, does CA have more equitable school funding than comparable states and if so is it because Prop 13 has shifted the funding burden from property taxes to income/sales taxes?

Given the size of the shortfall, and the other constraints imposed by the federal government and the state constitution, there's not a lot of choices. For practical purposes, the state General Fund goes to K-12 education, Medicaid, Corrections/Judicial, higher ed, and the rest of Human Services, in that order. K-12 spending is constitutionally required to increase. There are limits to how far you can cut state Medicaid spending and still stay in the program. The libertarians might be enthusiastic about an experiment with no state criminal code, prisons, or enforcement officials -- me, somewhat less so. Much of Human Services is constrained by various federal requirements. Which leaves higher ed.

Each post-secondary institution was asked to tell the Legislative Joint Budget Committee how they would manage if they received zero state funding during their annual hearing this month. The University of Colorado-Boulder and Colorado State might make it as private schools if all of the existing capital (land, buildings, equipment) were signed over to them and all restrictions taken off their tuition. The other four-year schools might hang on for a while. The community colleges would be toast.

A federal assumption of the entire Medicaid program would accomplish a lot of Democratic policy goals. So many so that I'm sure the national R's would fight it tooth-and-nail. Given how many state budget problems it solves, or at least improves greatly, I would be interested in hearing the national R's explain to their state parties why they oppose it...

I think you have this backwards. The problem isn't the difficulty in raising taxes (we have the highest sales and income taxes in the country) the problem is that our legislators are incapable of living within the budget.

Because, of course, that has nothing to do with the demands of voters and deferred expenses such as maintenance.

Personally, I'd restrict voting in any proposition that requires spending or limits revenue ONLY to those voters capable of filling out a spreadsheet showing that they understand the currect financial situation of the State and how the proposition will affect it.

I agree that the taxing and spending situation in CA is out of whack, but this post mixes too many independent things together. While they both appear in Prop 13, the 2/3 majority to raise taxes and the property tax portions are independent policy-wise.

CA historically has pretty volatile housing prices. It really does make sense not to price someone out of their home, which they could afford just fine when they bought it, just because their neighbor's home went up in value and the tax assessor wants to asses at the new price point. Putting a limitation on the increase of such taxes makes sense for residential properties. Residential properties sell a lot anyway, so they get reassessed fairly regularly. The key loophole is commercial properties, they often get held in corporate form indefinitely to avoid tax reassessment. I would have limited it to residential properties. Further I'm not very open to complaints that legislatures can't handle it well--it very predictable, and as such is very amenable to budgeting.

The 2/3 rule is ridiculous, at least in as much as spending doesn't require 2/3 to increase. It was probably supposed that restricting taxation was going to restrict spending, but we know that never happened.

Since people don't like taxation and they do like spending, a more practical rule would be to require 2/3 for spending and a majority for taxation.

But the pros and cons of such a rule are completely independent from the property reassessment rules.

My favorite Prop 13 anecdote: while she was alive, my grandmother lived in a wonderful house that she had (I believe) designed herself in the 50s or thereabouts, and built on what was then an undeveloped hillside. As time passed, however, that property became much, much more valuable, which makes sense since it was on the border between LA and Beverly Hills, on a delightful secluded street that ran up the hillside and dead-ended at the top. Phil Spector lived next door, and Eartha Kitt lived up the street.

But Spector and Kitt came later and paid higher taxes. And the people who own your grandmother's house now pay full value taxes (whether by sale or because a transfer took place at death). Prop 13 for residence ownership is naturally self-limiting and frankly not an enormous problem. As I said before, commercial property is another issue.

Seb: she was in that house for around forty years. Nearly 20 of them were after Prop 13. It's just crazy and stupid to keep assessments low for all that time. Plus, by the time Prop 13 was passed, both Spector and Kitt were in residence, and their assessments were also unchanged. (In Kitt's case, I think she might have moved out, but Spector was there for quite a while, and for all I know might be there still.)

(We used to spy on Phil Spector's bodyguards when I was little. There were a number of them. Lots of fun. We would have spied on him, but rumor had it he slept all day, plus there were the bodyguards, who gave even me pause.

Doesn't that increase the unfairness of the property tax system? Buy a house when prices are up and you're stuck forever.

It really does make sense not to price someone out of their home, which they could afford just fine when they bought it, just because their neighbor's home went up in value and the tax assessor wants to asses at the new price point. Putting a limitation on the increase of such taxes makes sense for residential properties.

This sounds a little like arguments for rent control. Not exactly the same of course, but aren't some of the effects similar?

California benefited more from the real estate bubble and more from the dot.com bubble than any other state. The state and local governments celebrated both bubbles by increasing long term spending based upon short term economic conditions.

Why should the state governments get all of the benefits of economic booms but get to pass the costs of the resulting busts unto the taxes (but not unto the illegal aliens residing in California).

The California voters deserve the problems that they are experiencing. They loved the increased spending during the good times while refusing to set aside government goodies in order to prepare for the bad times.

In my California county, the tax assessor is reassessing any residential properties that are being taxed above their current value, or so claimed the flyer that came with my tax bill; the catch is that the homeowner needs to contact the assessor's office and ask for a reassessment. I don't know about commercial properties, but I would expect it's the same.

Prop. 13 passed because people were perceived as being taxed out of their homes. Some undoubtedly were. But the effects were too sweeping, certainly -- and I agree they should never have been applied to commercial nonresidential property.

slight off topic bleg. Can someone explain how the process of real estate appraisal works in California? I ask because here in Japan, I got a bit of a shock. There are a large number of buildings being torn down and I thought that was a sign that maybe Japan's economy was more insulated from the world economic shocks. My wife said no, it is a sign of how bad the economy is because structures are taxed, so people are tearing down unused buildings, even though many are still serviceable locations, because they want to reduce their taxes to a minimum.

I'm still trying to understand the system (my wife handles most of the dealings with Japanese bureaucracy), so I'm wondering if anyone might like to give a rundown on the system(s) they are familiar with.

My very incomplete understanding of property appraisal in California is that it is usually based on "comps", comparisons of the property in question to other properties that have sold recently. A typical situation is that house A down the street sold for $300,000 in April and house B around the block sold for $350,000 in June. A appraiser looks at some differences between house A and house B such as square footage, any additions, extra amenities such as pools, etc., compares those to the property in question and comes up with some comparative value for it. I'm pretty sure that lots of stuff that makes a house more valuable/enticing to potential buyers, like a remodeled kitchen or curb appeal, is not considered in the appraisal.

Appraisal is fairly easy for a tract house in a neighborhood with recent sales. For a property in a neighborhood without recent sales, property with unique characteristics, scenic undeveloped property, etc., it becomes very difficult. In those cases, I don't know what else a good appraiser considers.

In New Jersey, the one state I'm familiar with, real estate appraisal involves municipalities requesting answers to a stock questionnaire from homeowners every few years. The data collected is simple: how many bedrooms and bathrooms, square footage, whether you have a furnished basement/attic, etc. The municipality uses those numbers in conjunction with recent sales data to generate a model that estimates home "value" based on the answers to the questionnaires. The model is very simple, so it can be wrong, but simple models at least tend to be robust.

1. Why is it more proper to tax real estate based on a hypothetical current value rather than an actual sale value plus 2% inflation per year as is the current law? Especially in light of the 'bubble' we've had where values have ben shown to be unsupportable. When a person buys a house they do so based on their ability to pay for it and the taxes are set based on that value. Why should a person be forced out of their house later because of a huge increase in property taxes just because the neighborhood gentrifies around them and their nominal value goes up a huge amount?

2. The State of California will be needing to lay off thousands of employees soon. I'm sure that will free up office space for the court of appeals to use. I don't think we have to worry too much about the judges.

3. Why, in a government of the people, for the people and by the people, should it be possible to raise tax rates or add new taxes by a simple majority? I do not accept the premise and you have not even attempted to justify it.

4. A surprisingly large proportion of properties trade every year in California such that the property tax base does rise. It rises also by an inflationary amount (2%) every year. When you consider also the price slumps that we suffer here every 8 years or so, I think you'll find that the overall lag is not huge.

5. California home sale prices are routinely among the highest in the nation. This results in actual property tax collections that are high. So...when you compare actual property tax collections in California to other states without prop 13 you'll find that California collects quite alot on a per capita basis.

6. California home prices were more in line with prices in the rest of the country before prop 13 was passed then they are now. It is hard to ague from that fact that prop 13 has hurt California prop tax collections.

1. Why is it more proper to tax real estate based on a hypothetical current value rather than an actual sale value plus 2% inflation per year as is the current law?

Why is 2% a sane value for inflation? Last time I checked, inflation in general was not 2%. The government actually measures inflation, so there seems to be no reason to pick an artificially low static value. Of course, in recent years, real estate values have far outpaced inflation, so we know that general inflation, let alone a static 2% inflation estimate, is not a good proxy for the underlying asset values.

Why should a person be forced out of their house later because of a huge increase in property taxes just because the neighborhood gentrifies around them and their nominal value goes up a huge amount?

There are a lot of marginal businesses that will fail if they have to pay taxes but can continue as going concerns if they don't have to pay taxes. Do you think we should eliminate all taxes on businesses? That strikes me as absurd. There will always be someone who gets screwed over. I don't find the plight of your hypothetical gentrifying property owner to be all that bad. If they can't pay the taxes, then they can find renters. If the area is really gentrifying, then they should be able to charge enough from the renters to pay the extra taxes and make a hefty profit. If they can't do that, then they can sell. If the area is gentrifying, they should make a huge profit. This is how investments work. I don't see why the government should devote itself to ensuring that people can continue owning real estate no matter what.

A surprisingly large proportion of properties trade every year in California such that the property tax base does rise. It rises also by an inflationary amount (2%) every year. When you consider also the price slumps that we suffer here every 8 years or so, I think you'll find that the overall lag is not huge.

If the overall lag is not huge, then switching to more frequent appraisals won't make much difference.

California home sale prices are routinely among the highest in the nation. This results in actual property tax collections that are high. So...when you compare actual property tax collections in California to other states without prop 13 you'll find that California collects quite alot on a per capita basis.

You might. Or you might not. Do you have any data showing that to be true?

//Because, of course, that has nothing to do with the demands of voters and deferred expenses such as maintenance.//

Voters don't make demands so much as they respond to promises made by politicians.

If a mere citizen knows his occupation is subject to cyclical swings in income he is apt to conserve in high times in order to make it through low times. To wit: farmers, fishermen, ski-resorts, grading contractors, etc. Why should state assemblies be any different? Instead, they promise all kinds of new programs when income rises and then threaten to cut the basic perennial programs when income falls.

Eight years ago the local city manager had one secretary and no assistants. Now he has two assistants and a secretary plus both assistants have secretaries. (The population of the city is not much larger than 8 years ago - maybe 10%). There is a large budget shortfall projected this year: I'm waiting to see if he lays off the extra assistants before he asks for more money.

3. Why, in a government of the people, for the people and by the people, should it be possible to raise tax rates or add new taxes by a simple majority?

Why shouldn't it be? Why is 2/3 obviously more correct? Or are you suggesting it should be unanimous, or maybe people could opt out of paying taxes if they didn't agree?

I don't understand your logic. Why should paying taxes require a different vote from anything else? Why shouldn't making some action illegal require a 2/3 vote?

5. California home sale prices are routinely among the highest in the nation. This results in actual property tax collections that are high.

Isn't it also the case that government spending doesn't go as far, dollar for dollar, in California as elsewhere because they have to pay more for their governmemt buildings and pay higher salaries so that government employees can afford housing? If you're going to bring that it, maybe you should be making geographic cost-of-living adjustments.

moe lane
//It's just crazy and stupid to keep assessments low for all that time. //

State your evidence.

Did grandma put more burden on the schools as time passed? Certainly not.
Did grandma put more burden on the roads, sewers, parks, courts, police and fire services as time passed?: Likely not. Yet her taxes went up 2% per year.

People are a little bit disconnected from reality on property taxes anyway (this is some of their appeal, I guess.) If everybody's property value goes up 100%, everybody cries because they think their taxes will go up 100%. When property values go down to 50% of the elevated value, everybody expects their taxes will go down.

You would think that the municipality is providing a basket of services for the money, and in a zero-growth environment, the value of your property isn't important; it's your property's value relative to everybody else's which determines what your share is. Doubling everybody's property value doesn't affect your proportion. (It does increase the cost of living for the workers providing the services, but taking that into account is too much thinking for a Friday.)

What I now wonder about is what effect Mello-Roos financing has on the zero-growth worldview. Ah, who cares, crank up the sales tax again, it's a hard one to avoid.

Here in MA we tax cars. You pay a sales tax when you buy the car, and never again. You pay an excise tax every year you own the car.

We could in principle do the same for houses. We could in principle select various combinations of sales tax rate and excise tax rate that yield the same revenue over a decade, statistically. Let's say we skewed heavily toward the (one-time) sales tax. So, for instance, you buy a house for $200K, pay $40K in sales tax up front, and $1K in excise every year. Over 10 years, you pay $50K -- the same amount as a pure real-estate tax of $5K per year.

Leaving aside the question of whether you think $5K per year is too much or too little, would the hybrid scheme address some of your concerns?

OK, let's talk California real estate. I live in a (silicon valley) neighborhood, in a butt-ugly (albeit big) ranch house built in 1945. I am surrounded by people who have been here for years, some of whom paid 25K for their houses. Unfortunately, I bought my house in 2000, at the height of the dot com bubble (because I am an idiot.) The year before I bought my house, only five houses sold in my town, and prices doubled. My house, which would have been about 1.4 million, cost me 3.25 million. Bought the house, ten months later, the silicon valley bubble burst. My house lost one-third of its value in ten months.

Let's just say that hypothetically we were going to trust some, um, department in the state government to figure out how the homes of people around me should change in value.

Sounds like a drinking game to me.

Don't get me wrong. I don't enjoy paying about 100 times more property tax than my neighbors. And I disagree that properties, when sold, "start taking advantage of the prop. 13 thing again" since current real estate values are so utterly bizarre.

Incidentally, any "leveling up" of real estate values would mean that the older people in our neighborhood would automatically have to move (since their retirement is based upon pre-funny money).

OK, let's talk California real estate. I live in a (silicon valley) neighborhood, in a butt-ugly (albeit big) ranch house built in 1945. I am surrounded by people who have been here for years, some of whom paid 25K for their houses. Unfortunately, I bought my house in 2000, at the height of the dot com bubble (because I am an idiot.) The year before I bought my house, only five houses sold in my town, and prices doubled. My house, which would have been about 1.4 million, cost me 3.25 million. Bought the house, ten months later, the silicon valley bubble burst. My house lost one-third of its value in ten months.

Let's just say that hypothetically we were going to trust some, um, department in the state government to figure out how the homes of people around me should change in value.

Sounds like a drinking game to me.

Don't get me wrong. I don't enjoy paying about 100 times more property tax than my neighbors. And I disagree that properties, when sold, "start taking advantage of the prop. 13 thing again" since current real estate values are so utterly bizarre.

Incidentally, any "leveling up" of real estate values would mean that the older people in our neighborhood would automatically have to move (since their retirement is based upon pre-funny money).

Turbulence, "If the overall lag is not huge, then switching to more frequent appraisals won't make much difference."

Right, it won't make much of a difference to the state but could make an enormous and painful difference to the owner.

"And are you in favor of rent control, or is acceptable for renters to be forced out of their homes when a neighborhood gentrifies? For what it's worth, I'm ok with both rent control and prop 13. It seems like when someone sees the need for one but not the other there is some sort of class warfare going on."

I think you aren't really understanding why rent control is destructive. If a renter occupied home has a long term income stream significantly below its value, the owner loses the incentive to improve or maintain the property. That doesn't happen with an owner occupied home which has a tax stream that doesn't go up to keep pace with his neighbors property values.

Oregon passed measure five a few years after California's Prop 13. It was a similar measure. I was in the public schools and lived through the subsequent changes that resulted therefrom.

There was equalization in spending between wealthy and poor districts. Generally the way it was managed was that the spending in formerly wealthy districts would be frozen, while the poorer districts caught up.

Many measures were used to smooth out this process, but, from a wealthy school district perspective it was about a twenty year period of one step forward, two steps back.

I do think it made the teacher's union stronger by giving them all a common target at the state legislature.

My districts hated it, because we generally had enthusiastic and motivated parents. They were frustrated because they couldn't raise money for programs they wanted.

From my perspective, some of the more "backward" school districts ended up getting rewarded for being either uninterested or unable to develop their own schools. This point is obviously dependent upon the prevalence of lack of interest as compared to inability. And my perception, coming from some of the more progressive districts, is probably biased.

In short, the impact was and still is, huge and mixed. Excellence was lost, minimal competence was gained. How does one judge the net effect of that?

For reference, I served as a secondary school principal in three different, relatively wealthy, school districts over this period of time.

Right, it won't make much of a difference to the state but could make an enormous and painful difference to the owner.

Well, anything can make an enormous and powerful difference to somebody. When analyzing policy however, what matters is how many people are affected and how severe the effect is. I don't think it is too great a sacrifice for elderly people to either rent out their properties or sell them and move downwind. I mean, lots of marginal businesses that currently fail might survive if we didn't charge them any taxes, but that's a really dumb reason to eliminate business taxes. Then again, I don't really get the emotional appeal that people develop for four walls and plaster. I try to save my affections for human beings rather than things.

Oyser Tea, thanks for your front lines perspective. That was very helpful.

Oyster Tea,
wouldn't Oregon be a special case because it doesn't have a sales tax? It also has a strange population distribution, with more than 2/3rds of the people living on the western side of the state and 40% live in Portland. While I think that the property tax initiative was based on the Prop 13 momentum, the effect on education was different because of the different tax structure in the state. This is not to dismiss your points, but a comparison with California might be misleading.

"Did grandma put more burden on the roads, sewers, parks, courts, police and fire services as time passed?: Likely not."

The main response, as KCinDC noted, is that the cost of these services probably did go up by more than 2% a year. When Prop 13 passed, iirc, inflation was in double digits.

However, since you brought up my grandmother, the first thing I thought when I read this was: how would you know, one way or the other? As it happens, she had dementia late in life, and before we managed to get her to stop driving, she did put an increased burden on the state. She was one of the more charming people I have ever known, and at 80 managed to convince whoever it was that should have given her a driving test that she didn't need one, so he should waive it. Ha ha ha.

First, as Sebastian rightly noted, exempting commercial real estate was a bad idea. I'd be interested in knowing who got paid off for that one.

Second, because property taxes are so low, the state and local governments here get an unusually large share of their revenue from sales and income taxes, which are a lot more sensitive to economic cycles. This tends to make the governments into fiscal basketcases. In good times, there's loads of money around and everyone gets a pony. In bad times, they have to cut basic services. I'd happily trade the pony for a somewhat steadier budget.

When times are good, the state is flush, and everyone gets a pony. When times are bad, the schools

Prop. 13 has been a long strange trip for California. It came into being because seniors on fixed incomes were being forced out of their homes by rising property taxes. At least, that was one key selling point during its campaign, and it was true. The more subtle idea was the theory that if property tax revenue was choked off, then government would be forced to live within its means and would be able to grow only slightly.

Hah hah.

So government found other revenue sources. One of the big problems with Prop. 13 is the fact that commercial property was included, which has been a big revenue loss for the state and caused odd distortions in the commercial market (as businesses invent esoteric ways to "sell" properties without incurring a tax reassessment).

Another big problem is that seniors, far from being forced out of their homes, are now trapped. My in-laws, for instance... we'd love to have them move closer to us so we could take care of them as their health worsens, but if they sold their home they'd take a huge hit in taxes (even with the one-time exemption) and then their property taxes would be 20 times higher than they are now... not doable on a fixed income. Counties used to have a property tax assessment "swap" program to prevent this issue from arising for seniors, but over the last decade this has vanished for almost all counties.

Finally, it's important to note that the sales tax, which is the major source of revenue for local government, used to cover about 70% of the economy. Now it only applies to about 40% of the economy... as more and more services (which are not taxed) become bigger parts of the economy. Other things that were not important before, and hence not taxed, have assumed major importance, such as commercial software installations (your company can buy a multi-million dollar software suite, and there's no sales tax because it's not a packaged product).

The revenue structure in California needs serious revision. For starters, I'd remove commercial property from Prop. 13 coverage (phased in over several years), and broaden the sales tax to cover services. Those two things right there would go most of the way towards covering the budget crisis even before you started to find places to cut the budget.

If a renter occupied home has a long term income stream significantly below its value, the owner loses the incentive to improve or maintain the property.

Most rent control is done for apartments, not single family housing. The owner has to charge new tenants a higher rent because the rent on existing tenants is fixed. It is analogous to the situation where the tax rate on existing homeowners is fixed. New homeowners must be charged a higher rate to compensate.

The effects are the same, also. Suppose the state could make an improvement that would cause the value of homes in a neighborhood to double. Without prop 13, they could use increased tax revenue to finance the improvement. With prop 13, that increase is greatly delayed to the extent that the improvement might not be worth doing.

If the California real estate market doesn't drive you to drink then you're not paying attention.

The state has had a bipolar economy ever since 1849. Growing up in CA during the 60's/70's taught me everything I needed to know about Bubblenomics. Came in handy the last couple of years. We are all Californians now.

Also, fwiw the leveling of revenue across school districts was not due to Prop 13 alone. Court mandated revenue sharing (the Serrano vs Priest decision) was already working its way through the CA educational system at about the same time. The mechanics would have been different without Prop 13, but some sort of breakdown of the autonomy of local school districts was going to happen regardless.

//Turbulence
Well, anything can make an enormous and powerful difference to somebody. When analyzing policy however, what matters is how many people are affected and how severe the effect is. I don't think it is too great a sacrifice for elderly people to either rent out their properties or sell them and move downwind. I mean, lots of marginal businesses that currently fail might survive if we didn't charge them any taxes, but that's a really dumb reason to eliminate business taxes.//

It sounds like we exist for the government's convenience rather than the other way around.

>One of the big problems with Prop. 13 is the fact that commercial property was included, which has been a big revenue loss for the state and caused odd distortions in the commercial market (as businesses invent esoteric ways to "sell" properties without incurring a tax reassessment).

In CA, most apartment buildings are owned by shell corporations. One does not sell the apartment building, one sells the shell company. Since the property never changes "ownership" the taxes never increase.

Here in CO, we have a similar bit of nonsense called TABOR that needs to be eliminated.

"Well, anything can make an enormous and powerful difference to somebody. When analyzing policy however, what matters is how many people are affected and how severe the effect is."

You seem to have lost the thread of the conversation.

You said "If the overall lag is not huge, then switching to more frequent appraisals won't make much difference."

Which is true for residences (we've already noted that Prop 13 for commercial property isn't self-limiting in the same way).

I then said: "Right, it won't make much of a difference to the state but could make an enormous and painful difference to the owner."

You then say: "Well, anything can make an enormous and powerful difference to somebody. When analyzing policy however, what matters is how many people are affected and how severe the effect is."

Which misses the point entirely. This is a difference that causes a very predictable (for the state) increase in taxes over time. Lots of people sell over time. Lots of people die on a regular basis. California gets access to those residential property taxes over time in a very budgetable way. The increase in property tax assessment can be quite variable without Prop 13. So we have a large institution which can manage an even and regular income stream, or we can have an individual try to manage a spikey liability structure. Why would we intentionally try to design the system so that the individual has to deal with the spikeyness instead of having the institution budget around a very predictable income stream?

California got its bills paid other ways, it isn't as if the taxes weren't getting paid.

The problem is the 2/3 rule, not the residential property rule. Hell the commercial property rule could be changed too for a major effect. Out of those 3 things, changing the residential property rule ought to be the last thing considered, yet for some reason it is the thing most talked about.

now-what 12:22
//Analogous situations, what is the main difference? Class.//

I'm confused by what you seem to be arguing.

The quote you reference:
//If a renter occupied home has a long term income stream significantly below its value, the owner loses the incentive to improve or maintain the property.// is basic economics. Why spend more if I can't make more (or at least recover the increment of new spending)?

You counter by dismissing that argument and saying it is not applicable to apartment owners. You seem to say that apartment owners have many units and they can recoup what they lose on a rent controlled unit by charging more to incoming tenants. But this is not true. In the real world a landlord charges what the market will bear to every new tenant no matter what. It is not possible to charge what the market will bear PLUS an increment to recoup what was lost on the rent controlled ones. So the amount of rent-not-received on a rent controlled unit is an absolute loss to the landlord. It is not something that comes out of the pocket of the more affluent tenant because he is already being charged what the market will bear.

//In CA, most apartment buildings are owned by shell corporations. One does not sell the apartment building, one sells the shell company. Since the property never changes "ownership" the taxes never increase.//

Not true. Anytime there is a 50% change in ownership of the corporate owner there is a reassessment. There is also the 2% inflationary assessment increase every year. There is also a dollar for dollar increase in the assessment for any physical work done on the property above a certain dollar amount.

So the amount of rent-not-received on a rent controlled unit is an absolute loss to the landlord. It is not something that comes out of the pocket of the more affluent tenant because he is already being charged what the market will bear.

You are making the false assumption here that rent control must be associated with an income requirement - that rent control is only ever instituted for the poor.

It's a class thing.

Which brings a higher rent, an apartment where increases in rent after a tenant moves in (at the market rate) are limited to half of the rise in the CPI and tenants can only be evicted for cause, or an apartment where the rent can be raised to any level the owner desires - high enough in fact to amount to an eviction notice?

Would you ever remodel a kitchen in an apartment where the most likely thing that would happen once you did would be to have your rent increased because the apartment can now fetch more in the market? People don't. Would you remodel a kitchen in a rent controlled apartment that you planned on living in for 20 years? People do. Which apartment then, is likely to be better maintained?

The infrastructure and common areas of the building would not be maintained by the tenants in this manner, and this is where the greater initial rent that the owner can charge would need to make up for the lack of ability to raise rents at will.

The analogy to prop 13 is almost exact. Which house gets remodeled, the one where the owner thinks he may have to sell in a couple years because of skyrocketing property taxes or the one where the owner knows he won't be forced to sell? Which house is more likely to have an extra room added, the one where it will cause an increase in property taxes to do so or the one where tax increases are limited?

The difference here is class. When people hear "rent control" they think "poor people" and one of the central tenets of a certain ideology in this country is "F*ck poor people".

//You are making the false assumption here that rent control must be associated with an income requirement - that rent control is only ever instituted for the poor.//

No I am not. Generally rent control applies to all apartments within the legal jurisdiction. It does not say what you can charge initially only how much the rent can increase over time. You are making the assumption that I am making the assumption.

//Which brings a higher rent, an apartment where increases in rent after a tenant moves in (at the market rate) are limited to half of the rise in the CPI and tenants can only be evicted for cause, or an apartment where the rent can be raised to any level the owner desires - high enough in fact to amount to an eviction notice?//

First a strictly economic argument: Assuming the owner is rational, the second way will produce the highest rent. This is because the rational owner will only raise rent to what he can reasonably expect to gain from a new tenant based on the prevailing market demand MINUS maybe a discount for the interest on deferred renovation costs (potential rent). If the potential rent is materially higher than what he is getting from the existing tenant than it is to the landlord's economic advantage to raise it. The change in the CPI is not strictly relevent. In the medium term apartment rents rise and fall with supply and demand and NOT inflation. In a stable environment, where there is not significant population outflow, rents tend to track with inflation over a longer term.

Second, 'for cause' seems fine but in practice it is difficult. I have had a tenant who sold drugs from his front window. When the porch light was on he was in business and when it was off he was not in business. When the porch light went on cars would come every few minutes, someone would go to the window and then they'd leave. The police knew. They staked it out. They arrested the guy. He pled to a lesser possession charge. And in the end I could not evict him because possession is not sufficient cause. He had to have a conviction for selling from the premises in order for me to evict him. After the trial, the selling continued but the police were not interested in doing anything because they had lost in court. They said they would have to wait until some kind of violence happened.

//Would you ever remodel a kitchen in an apartment where the most likely thing that would happen once you did would be to have your rent increased because the apartment can now fetch more in the market? People don't. Would you remodel a kitchen in a rent controlled apartment that you planned on living in for 20 years? People do. Which apartment then, is likely to be better maintained?//

I don't want my tenants altering the kitchens period. That is my job. There are building codes and fire issues to consider. Why do you think it is more to the advantage of either party for the tenant to spend their own money on kitchen renovations but not rent increases?

//The infrastructure and common areas of the building would not be maintained by the tenants in this manner, and this is where the greater initial rent that the owner can charge would need to make up for the lack of ability to raise rents at will.//

//The analogy to prop 13 is almost exact. Which house gets remodeled, the one where the owner thinks he may have to sell in a couple years because of skyrocketing property taxes or the one where the owner knows he won't be forced to sell? Which house is more likely to have an extra room added, the one where it will cause an increase in property taxes to do so or the one where tax increases are limited?//

I don't accept that the rental side of your analogy is true so the second half is moot.

//The difference here is class. When people hear "rent control" they think "poor people" and one of the central tenets of a certain ideology in this country is "F*ck poor people".//

No I am not. Generally rent control applies to all apartments within the legal jurisdiction

Here is what you said:

So the amount of rent-not-received on a rent controlled unit is an absolute loss to the landlord. It is not something that comes out of the pocket of the more affluent tenant because he is already being charged what the market will bear.

The more affluent tenant? Why would the tenant with rent control necessarily be less affluent than the tenant without rent control?

How do you even look at what you said and then claim that you weren't assuming rent control was associated with being poor - with less affluence? Why would the affluent tenant always be charged the market rate unless rent control was always associated with not being affluent?

Your arguments fail. It's about class. Rent control equals poor people in your eyes and your statements lay that bare.

Why do you think it is more to the advantage of either party for the tenant to spend their own money on kitchen renovations but not rent increases?

Hahaha. You are asking this as a serious question? You seriously fail to comprehend why a tenant would prefer to spend money on things they wanted to spend their money on - say, renovating their kitchen - rather than giving it to their landlord? I mean really....you can't figure it out? Hahaha.

Your views on class warp your perception of reality

I haven't revealed my views on class. You have revealed yours.

Second, 'for cause' seems fine but in practice it is difficult.

Running a business is difficult. It is work. Get used to it. No whining.

//The more affluent tenant? Why would the tenant with rent control necessarily be less affluent than the tenant without rent control?

How do you even look at what you said and then claim that you weren't assuming rent control was associated with being poor - with less affluence? Why would the affluent tenant always be charged the market rate unless rent control was always associated with not being affluent?

Your arguments fail. It's about class. Rent control equals poor people in your eyes and your statements lay that bare.//

Historically, rent control has been sold to the electorate using a class argument. I have only used the language common to the subject. In my opinion, there is no sound economic argument that can be made for limiting rent increases to half of the increase in CPI except those which are an appeal to class warfare.

You have been the one who has been pointing to class throughout this thread.

//Hahaha. You are asking this as a serious question? You seriously fail to comprehend why a tenant would prefer to spend money on things they wanted to spend their money on - say, renovating their kitchen - rather than giving it to their landlord? I mean really....you can't figure it out? Hahaha.//

Tenant: "I want to control your space, at a limited rent, for an unlimited time, and rebuild various parts of it any way I want - and you can't stop me because it's the law."

You wave a warped view of reality comrade. An individual without a place to live wants a place to live. He offers to pay an owner of shelter for the right to live there. They strike a bargain. I'll provide shelter with X and Y services for a term of Z months or years in exchange for M dollars says the landlord. If they agree, the tenancy begins. The rent AND TERM are negotiable. Why do you find merit in the state imposing artificial restrictions on the free exchange such as limited rent increases and an unlimited term? If the landlord and tenant are both willing to agree to a long term than the rent will be set for that term. Usually though the tenant says -" I can't commit for very long because I'm not sure what i'll want to do in a year" so he opts for a short lease term. You want to put both benefits (limited rent and unlimited term) on the side of the tenant by law. Why? Can you say why without recourse to a class argument?

//Running a business is difficult. It is work. Get used to it. No whining.//

Yes. It is difficult. I'm not whining. I am just using an example to make a point about the illusory justice of 'termination for cause'.

//I haven't revealed my views on class.//

Yes comrade. [wink]. Sometimes the struggle must use another dialect [nudge], one that keeps the cell in hiding.

In NH, I believe tax assessments are separate from market value or price at sale. Towns reassess periodically, say every 5 or 10 years. Houses sold or built in interim years are valued "as of" the last town-wide assessment date. So, a house built and sold this year would be assessed with comps at the 2005 or 2000 rate, depending when the last assessment was.

California's biggest problem isn't taxes or the lack thereof, but the number of people who actually thought Proposition 13 would make life better for the average Californian.

It's amazing, the number of people here who will put up with anything from government except taxes and fees. If Californians didn't have to pay taxes, they would be perfectly happy with the CHP taking a random citizen from each square mile of the state once a week and shooting him or her on sight. They vote for every form of insanity from three-strikes laws that mandate life in prison for shoplifting to code enforcement tickets for failure to cut the grass, but it takes an act of God to pass a quarter-cent sales tax increase.

I think this stems from the historical way California was populated in the first place. Before 1849, people came west to escape civilization in general and government in particular. They had to stop at the ocean, large rafts being unpractical in the Pacific storm season, so they settled here and dared anyone to try and tame them.

With the coming of the gold rush, these hardy loners suddenly found themselves inundated with every imaginable type of quasi-humanity, many of them greedy, uncouth, shoot-on-sight outlaws. They were forced to accept just enough civilization and government to keep from being murdered in their beds by the newcomers, but they have never, ever, accepted it as anything less than a poor choice between two evils.

In time, the forces of unbridled gold rush greed and the forces of unsatisfied pre-gold rush libertarianism genetically combined to make up the modern Californian: a totally warped soul with a sincere desire to punish the rest of the world just for existing, matched only by the sort of money hunger which has to be seen to be believed. This is the creature that brought forth Proposition 13 on the face of the earth, and to paraphrase Tiny Tim, God help us each and every one!

The driving force behind prop 13 was commercial real estate interests. They are the ones who benefited the most.

I remember the commercials for prop 13 telling stories about seniors being forced to move because of the increased taxes. Personally, I doubt it was that severe a problem, but I don't have data at hand. Even if it was, nobody cries when renters are priced out of areas being gentrified. Why are home owners sacred?

I like to think of property tax as rent paid to the county gov't. You are only renting the land your house sits on. It you don't pay your rent (property tax) you're evicted. So, prop 13 was rent control for property owners - as long as they stayed put.